I hope that money will never be paid back, just to teach the people who accommodated this a lesson.
Of course Goldman Sachs themselves cashed in on the deal immediately, and they probably used their client's money, so for them this has been a "successful trade". Will they ever stop, will they ever be kept accountable for what they do? I fear nothing will happen to them, again.
> I hope that money will never be paid back, just to teach the people who accommodated this a lesson.
Let's assume the money is never repaid; at this point it seems likely that at least most of it never will be especially given the enormous haircut private lenders already took. How does that teach GS a lesson? The article even quotes a German noting that CCSs are legal (not that following the law has done much for bankers over the last 10 years). More importantly, what makes you think GS has any net exposure to Greece at this time? The swap was sold on. There is very little Greek debt left in private hands and I doubt that GS would be so foolish as to have any material exposure to it, whether in the form of CCS or anything else. And the buyer of the swap, supposedly a Greek bank per the article, is already a total zombie regardless of this particular asset. Whether Greece defaults on it or not will not be material to its fate.
People will continue to deal with GS, despite (maybe even because of) their ever worsening reputation, as long as they can convince themselves that they are the ones who are going to get rich while the other idiots are going to get ripped off. The incentive scheme is similar to that of a slot machine.
That's exactly my problem: they screwed their customers, who stand to loose a lot of money (good for them, although this might include my own pension fund, who knows). And they screwed the other EU countries (so I'm already paying for this). And they screwed the Greek people with an expensive financing scheme that was only designed to obfuscate/hide things.
And yet there are no consequences to GS, they are not exposed at all.
I would be more sympathetic to this argument except that:
1. The Greek government that engaged in this transaction was formed following a free and fair election. The CCS was not some dictator's scam.
2. GS didn't screw their customers. If they screwed anyone, it was the buyer of the CCS, a Greek bank, who certainly should have known better. The net result of this trade was that the Greeks screwed themselves; if you think of the trade as a chemical reaction, GS was just a catalyst.
3. The other EU countries also have democratically elected governments that chose to participate in bailing out Greece rather than cutting it loose in the first place. Those same governments also deliberately overlooked not only sketchy off-balance-sheet stuff like this but also rampant overspending and excessive on-balance-sheet indebtedness by EU members both large and small over a period of many years.
The only real sympathy I have is for the anti-EU minority across Europe who keep voting against these scams and keep getting stuck with the bill anyway. But that's the universal failure of democracy for you; it's not only the EU that suffers it.
I did not know the buyer of the CSS was a Greek bank, but that only makes it worse: so GS exploited the weakness of politicians and used some interconnectedness towards this bank to make then take this deal?
Democratically elected or not, this is just wrong anyway you look at it.
I consider that very little. For comparison, Argentina defaulted on over twice that amount in 2002 (see https://en.wikipedia.org/wiki/Argentine_debt_restructuring). It also seems fairly likely at this point that many of the remaining private holders are non-banks that purchased the debt at a considerable discount to par, but that's speculation on my part.
It seems safe to say that the impact of the Greek default, at least as far as direct financial/economic matters are concerned, is going to be very limited. As far as the private sector is concerned, the damage has already been done.
I don't know if they broke any law, my problem is with their morality. They understood the (corrupt) needs of the Greek politicians (avoid structural reforms and hide the resulting budget deficit for EU partners) and created a product specifically for that. This product was bad for everyone, especially the Greek people. The only one benefitting was GS themselves.
GS seem to have no problem screwing an entire population to make some profit. They don't care that the Greek or EU people ultimately need to pay for it.
This is a product created at the request of the (theoretically) democratically elected government of the Greek people. Sometimes clients ask for silly things, but the customer is always right, no? Nobody is suggesting that GS misrepresented the swap to Greece. What should they have done? Gone around the country asking random people in the street what they thought of the deal? That would be an awkward requirement to impose on companies seeking government business. (Should Lockheed cancel the JSF because the people probably don't need it or want it?)
No indeed! I'm convinced (and was taught in Technical University) that you always have responsibility yourself. Bad things [1] happen if you do anything someone asks of you / pays you for.
GS isn't responsible for Greece's accounting/auditing, are they? They sold Greece a swap. Greece elected not to declare it as debt. It's not like GS has the power to force Greece to carry the debt on their books.
It might not be the case for Greece as I think accounting standards and regulations do not apply to states. But if that was for a company, I am pretty sure that structuring a transaction off-market with the intent to help a client hide its debt to the market would land a banker in jail.
I haven't seen the terms but I believe it is a simple cross currency swap. The problem being less the complexity than the off marketness. I believe that most accounting standards make you realise a loss or a liability if you enter into a significantly off market transaction.
Yes their leg was off-marketed.
At the time, ESA 1995 allowed this kind of transaction (actually most euro countries lobbied for looser rules on swaps as every major treasury was employing CCS (France, Germany and Italy to name a few, at the time those countries were running budget deficits hence they were in no position to argue for fiscal conservatism). Eurostat knew, even if they didn't (which is impossible as those transactions were reported) they could have if they read Risk Magazine.
Also, Goldman was just a piece of the puzzle, most deals were between Greek banks.
Seriously, they did their job, and in fact it' still business as usual (you'd think relationships went sour otherwise)
Jurisdiction is just a technicality. Let's set "Team America World Police" on the case!
To be fair, Americans aren't the only ones that assume US laws apply everywhere. I had a friend in the British Army military police and he said a few times he had squaddies say something to the effect of "I know my rights, I'm pleading the Fifth",'as if the fifth amendment of the US constitution counts for much in UK military justice. That's the power of Holywood for you.
Did the Fed bail out numerous foreign banks to prevent a largely US-engineered derivatives bomb from blowing up the planet? GS is doing the financial equivalent of selling plutonium in the Middle East, financing the purchases, and then hedging against their own plutonium customers with more derivatives.
People like to rip on Goldman, and indeed, they deserve it.
One thing which should be noted, though. There were two banks that didn't need a bailout back in '08-'09: Goldman Sachs and JP Morgan. They were forced to take the money by none other than Goldman's ex-CEO: Hank Paulson.
Goldman (and Paulson) profited hugely by the bailout of AIG. This bailout was focused on securities issued by AIG that GS held, and certainly wouldn't have taken place had the securities been held by e.g. Lehman. Let's rip Goldman for that one, too. Counterparty risk is a bitch, unless you own the Treasury Department.
Oh, well, GS says it did nothing wrong. Moving along!
They claim that the potential AIG default had been hedged. So what? The AIG securities were hedges in the first place; apparently that doesn't eliminate counterparty risk! If the public had not stepped in, and GS was forced to call upon the next insufficiently-capitalized insurer in the chain, it is likely that party would also have proved insufficient. After enough layers of recursion, eventually GS would have been left holding a bag of some size, and its precious shareholders would have lost some of their money. And that would have been perfectly OK. You can't claim with a straight face that unemployment would be any higher today in that fairer, more just world.
If the Treasury Secretary wasn't a Goldman alumna, there's no way in hell that only the AIG securities held by GS would have been made whole in the way that they were. That is pure corruption, and the verdict of history will be very harsh.
I'm truly very sorry if I upset you. I'm just trying to make sure we're on the same page. Goldman is indeed guilty, but not in a way that we agree.
Goldman had CDS against AIG imploding, had CDS-of-CDS against AIG's counterparties imploding, etc., etc. The solution to this hedging problem turns out to be the eigenvector of a CDS/exposure matrix, which is kind of fun.
Anyway... Goldman's bet was that the whole world would not implode. If there had been no bailout of anyone--you're right--everyone would've failed, including Goldman. In this scenario, there's no doubt in my mind unemployment would be higher today. But, given that someone was saved--anyone at all--Goldman turned out just fine. The cost of this hedge was ~$2.5 billion. For this, they were able to recover $10 billion. So, 75 cents on the dollar. More than they deserve!
The real crime has nothing to do with "needing to be bailed out"--this is just the story given to the public--it's the fact that Goldman may have had material nonpublic information about AIG. I think this article sums it up pretty well:
No worries! I was upset back in 2008-9, but now I consider that I've learned a valuable lesson about the nation in which I live.
You've turned over another rock to find another example of GS malfeasance, so thanks for the info, but you're wrong about economies in the long term. The fact that GS was backstopped by the public in this case, and that their ownership of Treasury had so much to do with that (now I see why a knucklehead like Geithner was fast-tracked into his current position), will inspire not just GS to keep doing the same thing, but everyone else in the market to emulate them. Next time around, all the amounts will be bigger, maybe even big enough to break the nation, but since everyone at every department and agency will be a puppet of some financial firm, our reaction will be even more corrupt. All because Bush the Lesser didn't have the stones to tell Paulson to go pound sand when he started his high-pressure sales routine. The seeds of future disaster were planted during this pretend disaster.
I've heard all the whining about pension funds and whatnot, but surely they weren't all all-in on GS and its ilk? When the stupid investment banks fail, the big institutional funds might drop 10 or 20%, but life will go on. This is an example of the well-known fact that sometimes securities decrease in value. The services that GS provides, others could provide just as well. The damage that was done to good regulation and fiscal prudence in this nation, will never be fixed.
Thank you! I certainly enjoyed this conversation, and I certainly appreciate your point of view. I can't disagree that people expect the big banks to get bailed out if anything bad happens again--big bank CDSs trade artificially low!
That's John Paulson, not Hank Paulson. I don't actually have much of a problem with John. He was never hired by Congress and the President for the benefit of the American public, so he never had a chance to abuse such a position to line his own pockets and those of his cronies.
In the case of Greece: As much I remember, one big German bank held many debts of this country in 2010, but the CEO of that bank also was the adviser of the German chancellor. No wonder, the so called rescue-umbrella did also rescue this banks money.
I am not sure of what you mean by "client money". It is not a deposit taking bank. (And even deposit taking banks are wrongly perceived as taking risks with clients deposits when in reality all losses go to the bank shareholders and the deposits are state guaranteed).
sorry, lenders operate under the principal that states do not default and do we really want them to operate otherwise?
If not GS then the IMF or some other organization would have been coerced to loan Greece money. Greece has been betting on the idea that the EU could not afford and would not allow them to implode.
When they got called on it they went into blackmail mode. Worse they set up a force failure by locking down bank transfers for the week. This means no one can do business, you cannot pay for what is being shipped and cannot place orders for more. Why would any EU company trust a Greek purchaser to pay now?
What must really happen is Greece must right size their government, pensions, employees, and military, to what they can afford and quit pretending its evil mean bankers that caused their plight. Oh they might have helped by lending money but Greece never would put forth serious effort to constrain spending.
The austerity the claim to suffer is applied the same way all politicians apply political pressure. By depriving those who already have no voice of essential services while making sure they themselves, their cronies, and supporters, don't suffer or as much.
Many sides have had their share in this. The Greek government of this time has made some severe errors. But I see an even bigger share in the EU (also German) politicians of that time (before the Euro was installed). It is a fact, that those politicians sold the Euro to the German population (I guess to others the same way) with the argument, that no country will ever have to pay for an other Euro country. They said, that there are so many security measures installed ...
But the weakest spot in those "security measures" where the politicians themselves. They wanted Greece to be inside the Euro, so they turned a blind eye to any warning signs. Of course they also turned a blind eye to every other country, because according to the "security measures" that where announced, nearly no country would have got the Euro ... (even Germany violated the terms)
So, I see the biggest failure in the politicians, that just wanted to have this adventure -- without really managing the risks ....
It is really an ugly business, and we will see, where all this disaster (the Euro) leads us to. In now 5 years of so-called crisis-management, they even did not manage to "rescue" Greece ... (they just prolonged the pain) and other countries can still become in trouble soon. With a bigger country, the troubles will be proliferated.
For me, the whole case is a (n other) portent of the incapacity of today's politicians.
Also, the fact that France and Germany both broke the 3% deficit rule that they had so strongly insisted on. They never had to pay a penalty for this. So there was one rule for the big countries and another for everyone else.
As I an Irish person, it makes me a bit bitter that ultimately part of whole problem for our economic recession was the Euro interest rates were ultimately too low for the economy we were running in the Celtic Tiger. Around 2003 or so onwards, we needed a higher interest rate to take the steam out of our economy. However, Germany and France had done pretty poorly for so long, we were locked into an interest rate and currency which was being dictated by them.
Ultimately only we are to blame (no one put a gun to our heads and asked us to play real-life Monopoly) and we won't shirk it like other countries (even though we should have thrown a few of the banks and bond-holders to the wall) but it irritates me that these fact is not mentioned more often.
New York has the same currency as Alabama. The US has no and will never have a unified economy and neither will we. We have to learn from our mistakes and install some systems to actually enforce these laws.
Unfortunately those people that invaded your island back in the days hinder us bit :)
>For me, the whole case is a portent of the incapacity of today's politicians.
Yes. Hilbert said "Physics is too hard for physicists.".
Politics is many order of magnitude harder. I would give one arm for reducing the difficulty of politics to even chemistry hard.
If it weren't possible to impose obligations on taxpayers, this adventure would never have happened.
By the way, using a common currency does not require that the debts of those using it should be the responsibility of all who are using that currency. California's debts are California's problem and the problem of those who buy its bonds. Other states aren't obligated to bail it out.
I also do not fully understand, why this is so. But before the Euro started our politicians drummed the big drums for it and repeated like machine guns, that such a situation could never, never ever (I swear!) happen ... But after Greece nearly went bankrupt in 2010, I guess, our chancellor said that this would be the "one and only alternative".
The problem is (as much I understood), that when one Euro country is going bankrupt, this will damage the confidence in the currency as such. But I don't fully understand the reasoning, as I said.
It also could be, that it was the "one and only alternative", because some big German banks would have been severely damaged back then (back then, they held a big amount of the Greek debts) ... Today, only the tax payers will be damaged, what is not so bad ...
> California's debts are California's problem and the problem of those who buy its bonds.
French and German banks had bough Greek bonds. France and Germany didn't want their banks to default, even though the banks had made these bad investments.
And they SHOULD let their banks suffer the consequences of bad decisions.
That's the only way a bank will learn to properly weigh benefits versus risks. If they get bailed out whenever a bad risk blows up, they won't learn to avoid or charge rates appropriate to the level of risk.
And depositors should also think twice about where they put their money.
If we want banks that don't default, we should have banks that only issue mortgages for less than 80% of a home's pre-bubble price. Let the buyer or another lender be on the hook for the risky part of the loan.
And if this bank fails, let its assets be turned over to a corporation owned by all the depositors, whose shares they can buy and sell. There's no reason to make the taxpayers pay to recapitalize the bank and keep the unwise bankers in business.
If there's a demand for that level of risk and the low rates it pays, that will solve the problem who want that level of security.
But we want to be insulated from risks and have them spread around to other people when dumb investments blow up. So even wise investors are stuck paying the costs. And we DO eventually have to face these costs despite all the borrowing and money creation we do to paper them over.
This isn't exactly the case - see Puerto Rico. For that matter, the debt (of Greece/Puerto Rico) is owned by other states/countries either directly or indirectly.
I think what you said is true. Of course it was a mistake to let Greece in that early. Nevertheless I think that overall they made the right choice.
These decisions ware made immediately after the cold war ended by representatives that were raised by parents that killed each other in a world war. European integration and the Euro are highly connected with the 2 + 4 talks [0] and German unity [1]. Europe would look very different if these politicians had not taken the risk and united it.
Might be, that part of it was because of the will to unite Europe, but it was from the beginning at least "well meant, but very badly executed".
What we have seen in the last five years, was growing resentment between Southern- and Middle-Europe because of the Euro. The "unity" of Europe is more endangered by the Euro, than rescued, as much I see now.
Idealistic goals can not make up for lies (about the security of the Euro, where no measures where really taken serious) and extreme poor execution. Some countries where taken in the Euro, just because some countries wanted to counter the influence of Germany. That is not idealistic, but purely old, dirty power politics.
One actor in this ugly story has demonstrably been repeatedly deceitful. We all know which one I'm talking about, even the leftist who can invent apologies for pretty much anything (I admire that "quality" in a way) do.
The borrowers were greedy, so they hired sharpers to help them borrow money they knew they couldn't repay.
The lenders were greedy, so they looked the other way and hoped their high-risk bets would pay off before things went south.
Deceit isn't really relevant here. The lenders consisted of hedge funds, major banks, large pension funds, and other financial entities. We're not talking about retail investors here, but people who had plenty of experience in sniffing out this kind of fraud. The bottom line is that they didn't bother: they looked at the eurozone membership and bloated ratings and pulled the trigger for an extra few basis points. After that went to hell, the official-sector lenders, who employ endless ranks of PhDs and ex-bankers to help them set policy and make financing decisions, stepped in and lent the Greeks even more money on ultra-sweetheart terms. Now that money is not going to be repaid, either. Who would have expected that outcome? Oh, right... everyone.
Really, at what point are we supposed to feel sorry for any of these people? I can't. With the exception of whatever tiny number of Greek citizens have steadfastly and publicly refused to support their government's choices, not only today but dating back to the go-go 2000s, every single player in this pathetic drama has gotten what they deserve. You can try to make this into some BS class-warfare thing, you can try to make it about left-right or broken EU politics or any number of other things, but what it really boils down to is persistent, pernicious greed coupled with persistent stupidity of spectacular magnitude. There's nothing else here, nothing to debate or cast aspersions over. Just greed and stupidity. Don't try to make it about anything else.
"This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives."
Sounds like Eurostat needs to hire some smarter people.
They almost certainly knew - it wasn't exactly a secret at the time - they just didn't care for political reasons. All the political momentum was for further European integration.
I lived in the UK during 1996-97 and there were plenty of stories in the news about the "poorer" countries being allowed to join the EU. Greece being the chief among them.
it's funny how few people on this comment board fail to realize we in the west are all greece soon.
too much leverage leads to an insolvent society, just as too much debt leads to an insolvent individual.
the history of the world is largely intertwined with stories of debt------who is under the control of whom else?
the answer to too much monetary debt is always monetary debasement. as the money supply is turned to toilet paper, as we have seen in the 20th century with zimbabwe and other countries------------the answer is that societies reform themselves.
the result is other types of debt and relationships arise to fill the gap, while poverty sweeps over the nation.
no financial trickery can solve this problem, at best one can hope to mitigate it.
firms like goldman sachs seek to exaccerbate it as financialization is rooted in crisis capitalism, generating and encouraging crisis in order to take advantage of it.
the entire wall street edifice has transititoned over the years from semi responsible stewards of financial wealth, to a parasitic casino that is built upon the practice of crisis capitalism, bribery and price manipualtion.
Where there is unconscionable conduct by a bank, Goldman Sachs are there. Where there is large scale fraud, Goldmans are there. Where politicians buy themselves a year of office at the expense of many years of misery for the people - Goldman's advising.
Why do these guys have a banking license in the EU?
When Gordon Brown launched the PPP scheme to essentially finance infrastructure development off the balance sheet, it was not an investment bank to blame - but a politician looking to fiddle the books to look good.
GS are a symptom, not a cause. They have a license is because they did and do what the people in power wanted, and until you can come up with a way to change the people in power and the incentives they have to stay there...
They are not punished, but praised and rewarded. Draghi was head of GS Europe at that time, now he is head of the ECB, with the power of ELA, OMT and Q€ to control the fate of nations.
As described in the different scenarios Germany would face only very few billions of liabilities in any given year. In total the numbers are high, but for the actual yearly budget, these amounts are peanuts. Even small German city-states are used to waste amounts of this size to build shiny concert halls [0] or airports that have crazy ventilation systems hidden below the floors.
Lots of comments trashing GS. I generally agree with all of them, but in an effort to be critical, I end up thinking that GS just executes what their customers don't have the guts/knowledge to do by themselves. Not that they are not legally/morally liable, but GS is not the only one to blame. As with everything in life, nothing is black or white.
Does anyone know of any reference that covers the actual trade that was done? This implies a seriously off-market x-cry swap. I would be interested in the terms esp notional and rate.
This article doesn't really explain much (other than that GS has savvy bankers which is nice to know)
Honest question: Can someone explain, in plain english, why it would be a bad idea to just kick Greece out of the EU? What's wrong with some good old anarchy and lynching a few dozen former politicians who led the Greeks to this abyss in the first place?
As an outsider, I am shocked by the hullaballoo going on to keep Greece in the EU. Why not let them reap what they sowed, as a nation?
First, there's the currency (the euro), and the political and economic union (the EU). There's a lot of overlap, but they're not the same.
There's a lot of debate about Greece and the euro, and while the current Greek government was elected on a platform of staying in the Euro, right now Greece is rapidly heading towards being ejected from it. But there's no real prospect (for now, anyhow) of them leaving the EU.
> why it would be a bad idea to just kick Greece out of the EU?
If you mean the EU, well, nobody really wants them to exit the Euro, but nobody wants them to exit the EU. It would also be ridiculously illegal; there's literally no process by which a country might be ejected.
If you mean the Euro, well, that's an interesting question. The general consensus is that Greek exit would hurt the remaining members and Greece fairly severely; a real case of cutting off your nose to spite your face. Some have suggested (and I agree) that a Greek exit would be worse for the remaining Euro-members than it would be for Greece.
> What's wrong with some good old anarchy
We're talking about people lives; pensions, savings, jobs, dreams. I don't think your flippancy is really appropriate. In any case the victims of a Greek exit won't be politicians and bankers; it will be ordinary people, in and outside of Greece.
> lynching a few dozen former politicians who led the Greeks to this abyss
I don't think you understand politics.
> Why not let them reap what they sowed
For EU leaders, this isn't about Greece, it's about the Euro and the greater project of European integration. They don't want Greece out of the Euro, and they sure as hell don't want them out of the EU. What they want is to keep Greece in the EU, without pissing off their voters too much. It looks like, at the moment, Greece will exit the EU despite what people want.
Thanks for the detailed reply! You are quite right about the part where I don't understand politics. I like revolutions better! Especially, where the guilty heads roll, figuratively at least.
However, this looks like a terrible mess that will, more likely than not, result in a humanitarian crisis of mythological scale, visited upon the poorest and weakest members of Greek society. So why don't EU states let Greece have that much needed meltdown, but use their money to aid those most in need during the ensuing crisis? I mean, by your analysis, no one culpable takes the fall. And who is culpable, if not the politicians in power over the past decade?
> I like revolutions better! Especially, where the guilty heads roll, figuratively at least.
The average Greek in the streets is more likely to blame German politicians than their own, so no revolution is likely. (And I'm not sure they'd be wrong either.)
> result in a humanitarian crisis of mythological scale, visited upon the poorest and weakest members of Greek society.
Honestly, I'm not sure it'll be much worse than what's already happened. The "internal devaluation" Greece has been forced to weather has been brutal, to the point that default and a "real" devaluation offers real hope of improvement.
> So why don't EU states let Greece have that much needed meltdown, but use their money to aid those most in need during the ensuing crisis?
The entire issue is that the rest of the EU (including some parts which are actually poorer than Greece, and have zero moral obligation to be sympathetic) really has no interest in spending their money to continue aiding Greece. Their voters, especially, do not. If they did, Greece wouldn't be heading towards default and exit of the Euro. But they don't, and as such, I don't think there's any good solution here.
In retrospect, Greece should never have joined the Euro.
As far as I know, if Greece does nothing very wrong (and defaulting isn't) there's no rule allowing other countries to kick them.
Anyway, Greece does not want to get out because on the EU they can travel and commercialize. That's the easy one.
Germany and the other creditors, by their side, do not want it because Greece may not pass trough that anarchy you talk about, but instead may get at the other side better than it is now. If that happens, the EU and their own economies are gone.
Nobody is talking about kicking Greece out of the EU. The current crisis is about the Euro group within the EU.
Problems with kicking Greek out of the Euro are:
- Greece is reliant on Russian gas. How are they going to pay for that? A weaker currency would make this problem worse. The often told story, that their exports would become cheaper does not apply very much, when your biggest company is a betting office.
- When Greece leaves with the option to get back in, countries like Portugal, Italy, Spain and even France would have much less pressure to consolidate their state finances.
- The Euro is not just a currency - it is a step towards European integration. With Russia biting of parts in the East, we cannot compensate to be set back this much.
And last but not least: I use this currency to pay my rent, do not fuck it up!
First , you can just kick a country out of the EU, that's impossible, once they are in they are in forever. Second if somehow you did this it would be the end of the EU politically speaking. It's already dead anyway since the Greek crisis has proven there is no real solidarity between EU states (and no,bailing out banks is no solidarity).
Of course Goldman Sachs themselves cashed in on the deal immediately, and they probably used their client's money, so for them this has been a "successful trade". Will they ever stop, will they ever be kept accountable for what they do? I fear nothing will happen to them, again.